Cut the Accounting Gimmicks!
Mar 13, 2014
I recently attended the “Monster Jam” Monster truck event at the local arena in town and it was a lot of fun. There were of course gimmicks or tricks among the racers, the announcer had his own gimmicks. Basically, the whole event itself was fa gimmick. That was all in fun and made for an enjoyable night! However, as much as gimmicks/tricks have a place in “Monster Jam” they do not, however, have a place in your accounting books.
I recently read an article about new measures for profitability. The article talked about how it is possible to use gimmicks to show profitability the way you would want to. Things like increasing debt in order to increase return on equity or moving locations to a lower taxing areas to “increase profit.” These type of tricks do not necessarily mean you are running the business any better. What types of gimmicks have you witnessed companies try in order to make things appear differently?
In this article the author, Shawn Tully, talks about Jack Ciesielski’s approach called “COROA” Cash Operating Return on Assets. This is where you measure actual cash returns. It is not about expected cash returns or inflated cash returns, but what is actually occurring. This approach does not allow for an addback of interest expense or deprecation expense, but includes that in the actual cash spent to earn profits. According to Jack, the best measure of profitability is comparing this actual cash to total assets. He also reminds us that using GAAP accounting, although important, often does not have a place when you’re trying to determine true profitability.
I am wondering if anyone has heard about this approach or maybe even used it in your metric calculations? I hope to hear from you if you have. Regardless, make sure you cut the gimmicks and are not fooling yourself and those around you. It’s important you are getting the best results and best metrics you can get, be honest with yourself and your boss, or eventually reality will have no choice but to hit you in the face!
Categories: Cost Accounting